Wednesday, July 14

OPEN LETTER TO P. NOY’s JUSTICE and FINANCE A-TEAM

The following article will be published tomorrow or the day after in the Philippine Daily Inquirer. If you agree with it substantially, kindly pass on or alert others of kindred spirits.

Eduardo B. Olaguer

*****OPEN LETTER TO P. NOY’s JUSTICE and FINANCE A-TEAM

We, the Advocates of Truth in Lending associates hereby announce that we are joining the national clamor “to defeat the enemies of the state through good governance… by wielding the tools of justice, social reform and equitable governance” as was so sincerely and inspiringly proclaimed by President Noy Aquino in his inaugural address. Thus we humbly dare to speak for the tens of millions of our countrymen who for so long have suffered with us, especially during the last twelve years, from unconscionably and iniquitously EXCESSIVE interest rates which have gone as high as 36% per annum that have been routinely imposed by commercial banks under the supervision of the Bangko Sentral; or those surreptitiously collected by quasi-financing companies NOT supervised by the latter charging at least 45% per annum; or by installment-sales Dealers of motorcycles/tricycles with their going rate of at least 58% p.a. AND, worst of all, by giant department stores and their “SUPERMALL” owners-BANKERS who charge their BONDED agents/dealers 2-month fixed interest charges of 5% to be added to and payable with the principal in 4-equal installments every 15 days, which actually translate to an effective rate of 57.6% per annum when computed on the basis of the Bangko Sentral’s statutory and mathematical definition of effective “Simple Interest” for such installment credit transactions. In turn, these agents/dealers recruit their own customers who will pay for their purchases on installment using the bank-and-mall-owner’s Credit Cards, at the higher rate of 7% (instead of 5%) for two months’ credit as the add-on interest charge, payable together with the principal in 4 equal semi-monthly installments. These naïve customers enter into such atrociously objectionable contracts, OBLIVIOUS of the universally recognized mathematical fact, (but certainly KNOWN by the mall-owners-bankers) that they are being actually charged interest at the stupendous rate of 80.64% per annum, based on the Bangko Sentral’s statutory formula. That formula has the force of law because it is mandated by Section 2i of CB Circular No. 158 which are the Implementing Rules and Regulations of The Truth in Lending Act (RA 3765). The root cause of this free-for-all nationwide GRAVE SOCIAL INJUSTICE perpetrated by means of gouging naively trusting consumers with unconscionably USURIOUS interest charges, is the fact that Ferdinand Marcos issued P.D. No. 1684 on March 17, 1980 thereby authorizing the old Central Bank to prescribe the maximum rate of interest. And so in 1982, the Jobo Fernandez-led Monetary Board WENT OVERBOARD by issuing its infamous Circular No. 905 which provided among others, that: “The rate of interest …. on a loan … regardless of maturity and whether secured or unsecured, that may be charged or collected by any person… should NOT BE SUBJECT TO ANY CEILING prescribed under or pursuant to the Usury Laws as amended.” (emphasis added) Nevertheless in various landmark Decisions e.g. Corazon G. Ruiz vs Court of Appeals (GR. No. 146942), Medel vs Court of Appeals (299 SCRA 481), Sps. Solangon vs Salazar (GR. No. 125944), the High Court has been consistently INVALIDATING excessive e.g. 3% per month (which is actually 42.576% per annum!), stipulated interest rates, and instead has reduced them to the legal rate of 12% per annum! And in Almeda vs PNB and Court of Appeals (256 SCRA 307) the High Court has reiterated that “Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result, IS VOID”! (emphasis added) It is high time therefore that P.Noy’s A-Team of policy and decision makers in the fields of economics, finance and justice working in collaboration with Congress, should immediately take steps to REPEAL this highly anachronistic and INIQUITOUS Presidential Decree No. 1684. Otherwise, it will only be in our oft belittled “Pilipines” where there continues to be such a barbarically CRIMINAL albeit legalized USURY imposed by and/or in collaboration with seemingly respectable Christian businessmen including prominent Catholics who despite being conscienceless USURERS, routinely participate in the “Holy Sacrifice of the Mass” and even dare to receive the Body and Blood, Soul and Divinity of our Lord Jesus Christ. They ought to be reminded that whether legal or not, USURY remains MORALLY ABHORRENT. (vide Catholic Catechism paragraphs 2409 and 2536) Hopefully therefore, our most respected Catholic economists will all see the GRAVE SOCIAL INJUSTICE in such a sad state of credit affairs, considering that no country in the whole wide world has ever attained sustainable long-term economic growth and stability, while burdened by high interest rates, and MUCH LESS when UNCONSCIONABLY EXCESSIVE. Thus our Supreme Court’s aforecited Decisions enlightened by its Justices’ mostly intuitive grasp of real economics AND with a deep sense of SOCIAL JUSTICE, have been consistently STIGMATIZING interest rates greater than 18% per annum as “iniquitous and contrary to public policy”, even if mutually agreed to by both borrower and lender!

Admittedly it will take at least a year for the repeal of Presidential Decree No. 1684 even assuming OPTIMISTICALLY, that the shaky majorities in both the Senate and Lower House will be in agreement. In the meantime however, there is SO MUCH that is DOABLE and OUGHT BE DONE IMMEDIATELY, in order “to defeat the enemies of the state through good governance” strictly on the basis of that little known and much less understood nor appreciated old Central Bank Circular No. 158 which provides the statutory teeth for the Truth in Lending Act together with the wellknown relevant provisions of our Civil and Penal Codes vis-à-vis commercial obligations and contracts. These forgotten statutory teeth of CB Circular No. 158 which was issued in October 1963, are the technical provisions under Section 2i thereof, which contain the statutory definitions (hence with the force of law) of Simple Annual Interest Rates i.e. interest rates per annum, and the statutory limitations on the widely mis-used interest computation formula I = PRT/365, as follows: (with emphases and comments added) “Simple annual rate” is the uniform percentage which represents the ratio, on an annual basis, between the finance charges and the amount to be financed.In the case of a single payment upon maturity, the simple annual rate in percent is determined by the following method: finance charge 12 x amount to be maturity period financed in months

Addendum: (Comments)a) Let the “finance charge” or interest be denoted as Ib) Let the “amount to be financed” or Principal be denoted as Pc) Let the “maturity period in months” be denoted as T and 12 as the number of months in one (1) year. d) And thus by substitution with the above algebraic symbols, the “simple interest” formula with LIMITED APPLICABILITY is the result, per CB Circular 158 (2i) derived as follows: The Simple Annual Rate R = I/P x 12/T or: R = 12I/PTe) And by transposition, it becomes:The Interest Charges or Finance Charges I = PRT/12 where T is the maturity period expressed in months which may often be less than 12 months, and R is the given or resulting Simple Annual Rate as the case may be, while P is the principal or amount to be financedf) And so if the maturity period T will be expressed in days (which may often be less than 365 days) instead of months, necessarily the denominator 12(months) should be replaced by 365 (days). Thus the formula becomes: I = PRT/365, Thus too: I = P x R x T/365, where P is the Principal, R is the given Simple Annual Rate, and T is the maturity period expressed in days, at the end of which “one single payment” of interest I is due. g) Hence I = PRT/365 MAY NOT BE USED on a monthly/quarterly basis PRIOR to loan maturity!

In the case of the normal installment type of credit of at least one year in duration, where installment payments of equal amount are made in regular time periods spaced not more than one year apart, the simple annual rate (R), in percent, is computed by the following method:

Number of payments finance charge in a year x amount to be total number of financed payments plus one

In cases where the credit matures in less than one year (e.g., installment payments are required every month for six months), the same formula will apply except that: the number of payments in a year would refer to the number of installment periods, as defined in the credit contract, if the credit matures in one year. For example, the number of payments in a year would be twelve for this purpose in a case where six monthly installment payments are called for in the credit transaction.

Incidentally, RA 3765 requires all establishments extending credit, to have all the above statutory provisions posted prominently within their premises!Sad to say, our commercial banks and other commercial lenders or financiers are favored with the obvious and benign tolerance of the Bangko Sentral whose chief executive Governor as well as its Chairman of the Monetary Board who is often the Secretary of Finance, are both usually former Presidents of our biggest commercial banks. Thus it practically explains why our local BIG MONEY LENDERS have succeeded in SUPPRESSING the statutorily-mandated FULL publication of CB Circular 158. And as a result, the formula I =PRT/365 and the more complicated formulae for installment purchases on credit, are often FRAUDULENTLY mis-used or ignored in computing the monthly or quarterly interest charges on loans and/or their corresponding “effective” rates. And so the FRAUDULENT compounding and bloating of already bloated interest rates well beyond their contractually stipulated Simple Annual Rates are cleverly or even CRIMINALLY DISGUISED! And so too unfortunately today, virtually a handful of borrowers outside big corporate boardrooms know for a fact that Section 2i of CB Circular No. 158 PROHIBITS the use of the formula I = PRT/365 except for interest charges covering “single payments upon maturity”!!! And worse, installment-sales buyers/customers unwittingly accept installment payment plans whose effective interest rates range from 57.6% per annum to as high as 80.64% per annum! In addition to our urgent recommendation for the immediate STOPPAGE of such widespread fraudulent victimization of innocent borrowers, we also completely agree with the incoming administration’s LOGICALLY CORRECT policy of FIRST IMPROVING TAX COLLECTION EFFICIENCY, before even considering the oppressive alternative of RAISING TAX RATES or TAXING OTHER NEW SOURCES of commercial revenue. Thus for example, it is a far simpler matter of IMMEDIATELY ORDERING the B.I.R. to APPREHEND and PENALIZE those responsible for the widespread commercial banking MALPRACTICE of NOT ISSUING OFFICIAL RECEIPTS on interest charges collected from borrowers, instead of increasing the Withholding Tax on such earnings. For it is a widely known fact that instead of O.R.s, merely Debit Memos and/or Statements of Account are issued by these banks to acknowledge interest payments directly deducted from the borrowers’ bank deposit accounts, thus facilitating large scale TAX EVASION… Our collective records show that all the abovedescribed commercial lending malpractices among others, have been brought up repeatedly to NO AVAIL to the official attention of both the Bangko Sentral and the B.I.R. as well as in various judicial courts over the last ten years. Nevertheless, these FRAUDULENT malpractices have continued UNABATED with ever growing IMPUNITY! Thus in a letter-complaint dated 5 April 2000 addressed to members of the House and Senate Committees on Banks, with a copy furnished to Mr. Rafael Buenaventura as Governor of the Bangko Sentral, one of our incorporators brought up the mathematically precise fact that the STATUTORY formula I = PRT/365 when fraudulently mis-used on a monthly basis instead of only for single payments of interest and principal “UPON MATURITY”, and if applied on an 18% per annum Promissory Note, such mis-use results in an effective rate of 19.56% per annum, or an illicit gain of 8.67% MORE (19.56/18), in terms of EFFECTIVE interest income earned by the lender-bank. Applying this ILLICIT incremental gain of 8.67% on Two Trillion Pesos in commercial bank loans outstanding in 1999 with an assumed average stipulated interest rate of 18% per annum, he conservatively estimated in April 2000 that the fraudulent incremental “boondoggle” was around P31 Billion per year. That was TEN YEARS AGO! That amount should now be at least DOUBLE on an annualized basis. In comparison, the one-time Bolante boondoggle in fertilizers worth some P728 Million, PALES in comparison. Therefore: tama na, sobra na!

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